SPC and SPP Issue New Criminal Liability Standards for IP Crimes

The new standards do not apply directly to the work of police and administrative enforcement authorities, such as customs, local copyright bureaux, or the Administrations for Industry and Commerce (AICs), which handle most anti-counterfeiting enforcement work in China. However, the new interpretation is intended to provide greater guidance for administrative authorities to determine when to transfer cases to the police (the Public Security Bureaux or PSBs) and when police should accept complaints from IP owners.

The new interpretation replaces prosecution guidelines issued by the SPP and the Ministry of Public Security (MPS) in April 2001, as well as an SPC judicial interpretation on copyright crimes issued in 1998.

Most of the numerical thresholds in the judicial interpretation are substantially lower than those set out in the 2001 prosecution guidelines. Consequently, it is expected that the interpretation will lead to a substantial increase in criminal enforcement for IP crimes.

New enforcement campaigns by various central government bodies, including the "Mountain Hawk" campaign initiated in November 2004 by the Economic Crimes Investigation Division of the MPS, have led to greater optimism that more government resources will be made available for anti-counterfeiting and that national and local government departments will have greater success in coordinating anti-counterfeiting work among themselves.

The new interpretation had been the subject of a great deal of lobbying by a number of industry associations, including by the Quality Brands Protection Committee (the QBPC - see www.qbpc.org.cn). The drafters of the interpretation accepted many of the suggestions offered by industry and foreign governments. Many others were clearly rejected, including most notably those regarding the treatment of repeat offenders, the methods for calculating case values, and the standards for proving knowledge for vendors and accessories to IP crimes.

It is hoped that many of the gaps left behind in the new interpretation will be dealt with through intervention by the SPP and the SPC in the course of handling individual cases. Without such intervention, IP owners are likely to find many of their future cases stymied - and particularly the more serious cases where counterfeiters consciously exploit gaps and ambiguities in the new interpretation.

Ultimately, the success or failure of the new interpretation is likely to depend primarily on the sufficiency of police resources and training, as well as the central government's commitment to eliminating local protectionism.

The MPS is reportedly drafting new rules to provide guidance to local police in determining whether to accept individual cases and when to formally establish cases (li an). IP owners are clearly hoping that the new attention to IP crimes within the MPS will translate into additional manpower and a willingness to proactively investigate a larger number of cases-particularly in "black-spot" regions where counterfeiting and other IP crimes are particularly rife. Undoubtedly foreign governments and industry associations will now start focusing more attention on the success of local governments, rather than just on the central government's activities.

Here we will give a brief summary of the key provisions in the new judicial interpretation as they relate to trademark counterfeiting. Comments regarding the provisions relating to copyright, trade secret and patent-related crimes will be discussed in the March issue of China Law & Practice.

Retroactivity

It remains unclear whether enforcement authorities and the courts may rely on the interpretation to pursue cases that arose before the effective date of the interpretation. Under a judicial interpretation of the SPC from December 2001, the new interpretation should be applicable to pre-existing cases provided that there was no other judicial interpretation previously in effect at the time the crime took place; this is more favourable to the offender. Since the April 2001 prosecution standards are not technically regarded as a judicial interpretation, it is therefore hoped that local and national authorities will conclude that the new interpretation is indeed retroactive. Further guidance on this issue should be forthcoming very soon, as IP owners are likely to test the retroactive effect of the interpretation in the next few months.

Thresholds

The value of a product needed for criminal prosecution and conviction has been reduced by more than half. Individual offenders will now be subject to criminal sanction where the value of fakes concerned exceeds Rmb50,000 (about US$6,000). The threshold is reduced to Rmb30,000 (US$3,700) where there is evidence that the offender concurrently counterfeited two or more brands (presumably of two different companies). Corporate offenders will be subject to criminal sanctions where the value of the product concerned is three times these amounts. This compares to five times under the 2001 prosecution standards.

"Extremely Serious" Cases

The interpretation sets out numerical thresholds also for determining when trademark counterfeiting crimes may be considered "extremely serious"- i.e., five times the level otherwise applicable. Under China's Criminal Code, such violations require incarceration for a minimum of three years and a maximum of seven years.

Calculation of Case Values

The interpretation requires authorities to use the infringer's actual sales prices when calculating case values (the "illegal business amount" or fei fa jing ying e). In the absence of evidence of actual transactions, the authorities are required to verify if there is an "indicated price", e.g., a price tag that appears on the packaging.

The interpretation further provides that, where it is "impossible to ascertain" the infringer's sales prices and there is no indicated price, reference should be made to the median market price of the victim's corresponding goods. This language is, of course, encouraging for trademark owners, in that it suggests a possibility of using legitimate product prices to calculate case values. However, it remains unclear how local enforcement authorities will determine when it is "impossible to ascertain" the infringer's prices. Under a best case scenario, the infringer's prices will be satisfied only where there is persuasive documentary proof of prior transactions, including disclosure of the buyer's identity so that details of transactions can be verified. In a worst case scenario, the authorities will be content with less persuasive proof, including declarations by the infringer or other incomplete documentation. The procedure adopted in this regard is, of course, critical for both IP owners and enforcement authorities, since ambiguities can lead to delays that can, in turn, give time to infringers to prepare fake documentation or to flee the scene before they are detained. (Administrative enforcement authorities do not generally have the power under Chinese law to detain suspected offenders.)

Semi-finished Products

Another key concern of industry in relation to the calculation of case values relates to the valuation of semi-finished products seized from infringer warehouses and factory sites. The new interpretation does not provide guidance as to how components, packaging, labels and other raw materials are to be valued. Industry associations had proposed that the value of such materials be calculated as if they were finished goods, in order to close an obvious loophole in prior practice under the 2001 prosecution standards. Clearly, these proposals were rejected by the SPP and SPC.

In many industries, counterfeiters have become savvy to criminal prosecution standards and, to avoid liability, have kept the value of finished products held at any one place at any given time below the relevant threshold. More sophisticated counterfeiters have produced at night (when raids are harder to organize), assembled only upon receipt of confirmed orders, and shipped out products as soon as they can.

Hopefully, the valuation of semi-finished product will be addressed in a positive manner in future case decisions by the courts or policy directives from the SPP, SPC or other authorities.

Repeat Offenders

The interpretation provides that where an offender has committed repeat offences and been raided previously by administrative authorities, the value of product seized in prior raids may be used to generate the illegal business amount for criminal enforcement purposes. This is, however, subject to the condition that the administrative authorities that conducted previous seizures have not already imposed administrative sanctions. It is unclear whether the same victim must be found to have been infringed in prior administrative actions or whether it is possible to aggregate the product values where the earlier cases involved different brands.

This new provision should in any case prove useful, since in many cases, factories continue producing fakes immediately after administrative raids, in part to fulfil outstanding orders and in part due to their lack of fear of eventual administrative sanctions.

Industry had pressed the SPC and SPP to agree to retain the broader repeat offender rule that appeared in the April 2001 prosecution standards. This rule, which does not appear in the new interpretation, mandated criminal prosecution where an offender had previously been penalized by administrative authorities on two or more occasions, but is found to have continued infringing behaviour. According to judges involved in the drafting of the interpretation, the decision to exclude a corresponding provision was intentional, as there was widespread consensus that if an administrative fine has been imposed against an infringer, its debt to society has been paid. This reasoning clearly ignores the reality with respect to repeat offenders, i.e., that administrative sanctions have proved insufficient to deter them from committing further offences. Hopefully, central government authorities will reconsider the possibility of reintroducing a repeat offender rule. In the meantime, it is hoped that local police and prosecutors will consider doing so on an ad hoc basis by relying on the catch-all provisions in the new interpretation.

Trademark Labels/Packaging

The new interpretation permits prosecutions against a producer or vendor of trademark representations, including labels and packaging, where the number of items involved exceeds 20,000. This is the same threshold provided in the 2001 prosecution standard. However, the new interpretation also reduces the threshold to 10,000 where the infringer is found to have dealt in two or more brands.

The new interpretation does not clarify that producers of completed counterfeits (as opposed to labels) may be held criminally liable if they are found to possess more than 10,000 or 20,000 units of assembled or unassembled trademark representations. Some local courts have found such factories criminally responsible in such circumstances in the past, but there is no national standard to ensure the same result in other cases in the future.

Definition of "Knowledge"

The interpretation contains examples of situations in which authorities may presume that a vendor of offending products acted with the requisite knowledge (as per Article 214 of the Criminal Code). Only three examples were given: where the marks appearing on goods have been altered; authorization documents have been forged; or the infringer is a repeat offender. The limitation of examples to three is clearly disappointing, since experience suggests that local authorities-particularly those with protectionist tendencies-will refuse to consider other types of evidence.

The interpretation provides for satisfaction of knowledge requirements in "other circumstances where [the infringer] knew or ought to have known" the goods were counterfeit. This language not only suggests authorities should keep an open mind; it also suggests that a negligence standard is applicable. Naturally, proving knowledge is a difficult challenge in many jurisdictions, and it is hoped that the MPS, SPP and/or SPC will eventually develop more detailed guidelines to assist local administrative authorities and the police in determining whether to pursue particular cases against vendors.

Accomplice Liability / Import-Export

Unlike the 2001 prosecution standards, the new interpretation clarifies that liability may be pursued against accomplices to IP crimes. Examples given of accomplice behaviour explicitly include the provision of import-export agency services and the provision of rented facilities (i.e., landlords).

Accomplice liability is also subject to a knowledge requirement. The interpretation does not clarify whether the above-mentioned provisions regarding knowledge requirements for vendors are also applicable to accomplices, although it would be reasonable to assume they will be.

The export of counterfeit goods from China is obviously a growing problem, and industry associations had hoped that the new interpretation would provide more specific examples to help customs and local police in determining whether the conditions exist to permit action against import-export companies that deal in fakes. It was specifically hoped that the interpretation would clarify that such companies could be pursued if they failed to check the authenticity of goods or whether there are other conditions, such as price and the source of goods, which would raise a presumption of negligence. Again, it is hoped that in the coming months, national police and prosecutors will provide further guidance on these issues to local enforcers, including customs.

Well-known Marks / Pharmaceutical Products

Industry associations had expressed the hope that the new interpretation would reduce or eliminate numerical thresholds for cases involving marks deemed "well-known" trademarks and cases involving fake pharmaceuticals or other goods that pose serious health risks. Such provisions appeared in the April 2001 prosecution guidelines, but were rejected by the SPP and SPC for the new interpretation for a number of reasons.

Private Prosecution

Chinese law permits trademark owners to pursue action against counterfeiters through so-called "private criminal prosecutions" filed with Criminal Tribunals of the People's Courts. Such prosecutions have been historically rare. In part this has been due to brand owners' preference for pursuing infringers with the support of the police and prosecutors. However, if the new interpretation drains police resources in a given region, brand owners may want to consider private prosecutions, and particularly after administrative action through the AICs, customs or the Technical Supervision Bureaux (TSBs).

The new interpretation does not clarify whether the numerical thresholds are equally applicable to private prosecutions, but it would be reasonable to assume they do, as the new standards are intended to provide criteria not only for commencing prosecutions but also for imposing criminal liability.

TRIPS Compliant?

Policymakers clearly understand that, while administrative enforcement is cost-effective, the growth of counterfeiting and exports of fakes from China requires a substantially greater criminal deterrent. Thus, the reduction of numerical thresholds for counterfeiting and other IP offences is clearly a step in the right direction.

The Chinese government notes that, both in China and internationally, criminal sanctions in smaller IP cases are normally limited to fines. Therefore, it is argued that administrative enforcement has the same deterrent impact, but is substantially more cost-effective. Criminal enforcement is being strengthened, and administrative penalties are likewise set to increase later this year after the SAIC issues new enforcement rules. The Chinese further argue that a certain degree of patience is required, as the development of a stronger legal and practical infrastructure for criminal enforcement will in any case take time.

For their part, foreign companies often ask whether the use of numerical standards meets the test of common sense, and this is evidenced by the fact that only Vietnam and China rely on them to determine criminal liability. The value of goods produced or sold is relevant in almost all countries to the determination of the proper penalties, but not to liability itself.

In the experience of many companies, infringers-particularly more sophisticated ones-will merely respond to numerical standards in China by adapting their behaviour to avoid detection, rather than by stopping their violations. Tying criminal liability to numerical standards simply provides a loophole that smarter counterfeiters are sure to exploit. It is further argued that China's existing regime is dysfunctional, as evidenced by the fact that criminal transfers from the AICs to the police continue to decrease. Indeed, in the first six months of 2004, out of the thousands of trademark cases handled by local AICs, the number of successful transfers to the police fell 46% from the prior year, to just 14 cases.

Many foreign companies and governments with experience in the PRC market opine that if the Chinese government wanted to stop counterfeiting through tougher enforcement, it has the capacity to do so through tough criminal measures. Hence, the main obstacle to a more effective counterfeiting crackdown is political, rather than legal, in nature.

Both perspectives are in some ways valid and warrant consideration. But the patience of foreign industry and governments is likely to be tested in the coming year, as the scale of counterfeiting in China and the harm caused by exports of fakes to other markets is already enormous and appears to be growing rapidly. This is illustrated by statistics recently made available by the US government for the year ending October 2004. The total value of seizures by US customs increased 47%, from $94 million to $138 million-with 67% of the total coming from China.

In the absence of rapid improvements, attention will increasingly be focused on whether the efforts of the central and local governments in China in anti-counterfeiting are sufficient to satisfy China's commitments as a WTO member. Under Article 61 of the TRIPS Agreement (the WTO's Agreement on Trade-related Aspects of Intellectual Property Rights), China agreed to make criminal sanctions available in counterfeiting as well as copyright piracy cases that are deemed to take place on a "commercial scale". This "commercial scale" standard is far lower than the standard set out in China's Criminal Code, as well as the numerical thresholds set out in the new interpretation.

The reduction of numerical thresholds for counterfeiting and other IP offences is clearly a step in the right direction for China. But given the ongoing Section 306 monitoring of China by the US Trade Representative and close attention as well from the European Union and Japanese governments, China runs a serious risk of a WTO dispute being filed if it cannot demonstrate rapid progress in reducing counterfeiting and copyright piracy in the next several months. If this does not occur, the new liability standards may well be blamed for creating as many obstacles as they eliminated, and international attention will focus on China's compliance with Article 61 of the TRIPS Agreement.

As suggested above, whether the interpretation meets its objective will depend in great part on whether local governments are prepared to provide the needed political and practical support to enforcement organs. To support this change, foreign companies and governments will need to shift the focus of lobbying more to the provinces, rather than just on Beijing.